►The Great American Bond Bubble
Jeremy Siegel and Jeremy Schwartz/Wall Street Journal
Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago. A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds.
► China Reduces Holdings of Treasury Debt in June
China reduced its holdings of U.S. Treasury debt for a second straight month in June while the holdings of Japan and Britain rose…The debt figures are being closely watched at a time when the U.S. government is running up record annual deficits. A drop in foreign demand would lead to higher interest rates in the United States.
►China Hiding Treasury Purchases
Derek Scissors/Heritage Foundation
China’s reported holdings of U.S. Treasury bonds fell sharply again in June and are now almost $100 billion lower than they were in July 2009. The press reports this as meaningful and important. It isn’t. You may have noticed that American interest rates are not soaring; in fact, they’re at historic lows. One reason they’re not soaring is because, contrary to widespread assertions, American interest rates don’t depend on the PRC. The other reason is, over the same period, reported British holdings of U.S. Treasuries rose $265 billion. Why would the UK increase its holdings 273% in 11 months, when the yield on Treasuries is close to zero? The answer: China’s State Administration for Foreign Exchange (SAFE) has an office in London. When purchases are made through that office, they are initially counted as purchases from Britain, not China. SAFE’s goal is to reduce China’s visible dependence on the United States.
►China Doubles Korea Bond Holdings as Asia Switches From Dollar
Frances Yoon/Bloomberg News
China more than doubled South Korean debt holdings this year, spurring the notes’ longest rally in more than three years, as policy makers shifted part of the world’s largest foreign-exchange reserves out of dollars.
►We need more quantitative easing to create jobs
Roger Farmer/FT Economist Forum
Quantitative easing encourages the private sector to create more jobs. As yields on long term assets fall, some of that money moves into equity and newly capitalised firms expand and begin to hire workers. In light of a slowdown in the global recovery, quantitative easing is a programme that should be vastly expanded.
►Bank Of England Admits Being Surprised By Increased Inflation Rate
Staff/All Headline News
Bank of England Gov. Mervyn King admitted he was surprised by the strong inflation rate registered in July. Britain logged a 3.1 percent inflation rate last month, higher by more than 1 percent of the government target of 2 percent.
►Bank of England voted 8-1 for steady policy
The Bank of England’s rate-setting Monetary Policy Committee earlier this month weighed the case for further easing of monetary policy as well as tightening before voting 8-1 to make no changes, according to minutes of the meeting released Wednesday.
►Fed’s Bullard Supports Asset Purchases If Inflation Falls Further
Jon Hilsenrath/WSJ’s Real Time Economics
The Federal Reserve might need to commence a program of moderate purchases of U.S. Treasury bonds if inflation continues to fall, James Bullard, President of the Federal Reserve Bank of St. Louis, said in an interview with the Wall Street Journal.
Mr. Bullard has become a vocal proponent of asset purchases if the economy continues to weaken and inflation falls further, though the subject is still the source of vigorous internal debate at the Fed and it’s not clear whether it will take this step. At its August meeting, the Fed took a small step in that direction by deciding to reinvest proceeds from maturing mortgage backed securities into Treasury bonds.
“I thought we should be in a position to return to a quantitative easing program if we got further disinflation,” Mr. Bullard said. Quantitative easing is a term central bankers use to describe purchases of assets like Treasury or mortgage bonds by the central bank, which floods the financial system with cash and could help to drive down long-term interest rates and spur growth. Fed Chairman Ben Bernanke has referred to the Fed’s purchases in 2009 as credit easing.